WASHINGTON — Fannie Mae and Freddie Mac have made progress toward correcting financial weaknesses, but tight government supervision is needed as the mortgage giants emerge from accounting scandals, a federal regulator said Thursday.

James B. Lockhart, director of the Office of Federal Housing Enterprise Oversight, also disclosed that Fannie Mae, which just last month announced a restatement of $6.3 billion in profit for 2001 through mid-2004, had a loss in the third quarter of 2006. He did not specify the amount of the loss.

“They unfortunately have very, very large problems,” Lockhart said in a meeting with reporters, referring to the government-sponsored companies that are the two biggest financiers in the $8 trillion home-mortgage market in the United States. “They have a long way to go; there are still significant worries.”

The problems “are massive and they’re ongoing,” he said.

Lockhart noted that the companies’ financial results continue to be volatile from quarter to quarter, saying that both lost money in the July-September period last year. Freddie Mac, the smaller of the two, recently forecast a loss of about $550 million for the quarter due mainly to declines in interest rates, compared with a profit of $880 million in the third quarter of 2005.

Fannie Mae has not reported or forecast its results beyond June 2004.

The company, which is the second-largest U.S. financial institution after Citigroup Inc., is not expected to return to timely financial reporting until early next year.

Fannie Mae spokesman Brian Faith declined to comment on the third-quarter results.

With the Democrats now in control of Congress, prospects have improved for compromise legislation tightening the government’s reins on Fannie Mae and Freddie Mac.

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The Oregon Department of Consumer and Business Services on Thursday announced changes to its regulations of the mortgage lending industry.

The state agency said the changes — which include adopting new rules and guidelines and increasing education and enforcement efforts — are in response to consumer and industry concerns.

The agency’s Division of Finance and Corporate Securities adopted new rules, effective Thursday, that implement more stringent education requirements for mortgage professionals and ensure that mortgage lenders are effectively supervising their loan originators. A complete list of the rules can be found on the agency’s Web site at dfcs.oregon.gov.

The Division of Finance and Corporate Securities also is addressing the increasing number of nontraditional loans offered to Oregonians by adopting guidelines for state-regulated lenders. The guidelines — which are based on federal guidelines for national banks and institutions — outline best practices related to two types of nontraditional loans: “payment option” and “interest only” adjustable rate mortgages. With these loans, borrowers exchange lower payments during an initial period for higher payments later. For example, in an interest only mortgage, a borrower only pays interest at first but eventually must pay interest and principal each month. As a result, the payment could increase substantially — even doubling in some cases.

“Nontraditional loans appeal to consumers who may not qualify for traditional loans, and these borrowers often do not understand the risks they may face,” David Tatman, administrator for the division said in a statement. “These guidelines will protect those borrowers by directing lenders to clearly explain the implications of the loans and evaluate the borrower’s ability to make monthly payments even when the loan rates are adjusted after a few years.”

The guidelines, which have been adopted by 19 states, will become part of the method used by examiners and investigators during compliance reviews of state law and regulation.

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New, existing home sales to continue slide before bouncing back in 2008
WASHINGTON (MarketWatch) — Fixed-mortgage rates are expected to rise to about 6.5% by the end of 2007, and sales of both new and existing homes are expected to slide this year, the Mortgage Bankers Association said Tuesday.

In an economic forecast, the trade group estimated declines in 2007 of 7% in existing-home sales and 8% in new-home sales.

Over the past year, existing-home sales have fallen by 10.7%, according to the National Association of Realtors. Meanwhile, sales of new homes have fallen 15.3% over the past 12 months, according to government data.

However, the housing market is set to stabilize in the months ahead, said MBA’s chief economist.

“We believe that the housing slowdown will have dissipated by mid-year,” economist Doug Duncan told reporters Tuesday.

The mortgage bankers’ group said sales of both types of home should bounce back by 3% in 2008 and by 1% in 2009.

Total residential-mortgage production in 2007, meanwhile, will be $2.39 trillion, down 5% from 2006. Originations should fall 4% in 2008 and 6% in 2009, MBA said.

Borrowing costs for 30-year fixed-rate mortgages are currently averaging 6.13%, according to MBA.

Kurt Pfotenhauer, the group’s senior vice president for government affairs, said in a statement that the bankers’ association will press lawmakers and the White House in the year ahead to reform government-sponsored mortgage companies Fannie Mae and Freddie Mac reauthorize terrorism-risk insurance and set a new standard for combating predatory lending.

Pfotenhauer said during a press briefing the group is “encouraged” that new House Financial Services Committee Chairman Barney Frank, D-Mass., has made predatory lending one of his top legislative priorities.

Lawmakers came close to passing a bill overhauling rules on Fannie and Freddie before the November congressional elections, but weren’t able to hammer out a compromise. The bankers’ group said it’s pushing for an independent regulator for the companies that will set affordable housing goals and ensure a competitive secondary mortgage market.

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